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Foreclosure Law 101: When Mortgages Go Bad

Knowing the legal definition of foreclosure is not enough for those who face the reality of a demand letter from the bank calling in a multi-hundred thousand dollar loan immediately and which has that dreaded word - foreclosure - printed in bold letters. Home owners need legal information to face the well-trained legal hounds hired by the bank to sell your home and make sure, at least, that the bank shareholders have a regular dividend.

Some Historical Context

In the common law, especially as it evolved within equity courts, every mortgage comes with the right of the lender (mortgagee) to take back the real property if the borrower and mortgage-holder (mortgagor) defaults on the loan.1 This is the process of foreclosure and is of the very essence of a mortgage.

It is standard procedure to not defer to the common law principles of foreclosure and, instead, to provide for the right of foreclosure either in a law of general application throughout the jurisdiction or, more frequently, by way of contract between the mortgagor and mortgagee, in which the mechanics and process of a default and subsequent foreclosure process is spelled out. In reality, when a foreclosure runs its course, it generally relies first on the contract and where that contract is silent, on any applicable statute and, finally, if need be to call upon it (which rarely happens), the common law of mortgages.

Equitable remedies (eg. redemption) or the common law are becoming less relevant as statutes and mortgage contracts displace the uncertainty of dusty law books but the core concept is that the lender retains title under the loan has been paid off. Here is one expression of the basic law:

"At common law, a mortgage is a conveyance of property to secure the performance of some obligation, the conveyance to be void on the due performance thereof, and the mortgagor has a strict legal right to redeem his or her property by the due performance of the obligation....Title passes to the mortgagee and reverts to the mortgagor upon his due performance by him or her of his or her obligation....

"In many jurisdictions, there are statutory provisions of providing for redemption from sale following foreclosure. The right of redemption based in equity, by contrast, is a right of the mortgagor prior to foreclosure."2

Canadian jurist Joseph Roach:

"The foreclosure is the opposite of the right to redeem. It is the judicial means by which the mortgagee extinguishes the mortgagor's equity of redemption and becomes absolute owner of the land given as security for the loan."

The Modern Foreclosure Process

The first step in a foreclosure action is usually a demand letter for full payment of the balance owing on the loan (click here to see a real foreclosure letter in PDF format). That letter will usually include details of payments and non-payments as well as a summary of the contractual rights of the foreclosing mortgagee.

Never rely on this summary. There could well be typographical errors or even a wrong interpretation of the mortgage contract which favors the bank.

If you are like 99% of persons facing foreclosure, the first steps in ascertaining your legal rights starts in your mortgage contract, often referred to as mortgage terms, and often small-print unilateral contract signed when you first borrowed the mortgaged money.

Most of these contracts contain acceleration clauses, so that by the fact of one or more defaults, the whole amount becomes due and payable.

Defaulting on the loan is not always the only reason for the foreclosure. If the bank gets a whiff of issues between the mortgagor and the insurer of the real property, for example, that may be enough to start foreclosure proceedings.

Local statute may stipulate where foreclosure proceedings must be taken; this, to avoid a bank from starting an action in some remote registry of the court some hundreds of miles away from an insolvent debtor.3

After the mortgage contract has been reviewed, the second source of law for persons embroiled in a foreclosure action, is statute. Some jurisdictions have neatly codified the process of a foreclosure, such as British Columbia, although the latter has primarily done so in the Supreme Court Civil Rules, a jungle of legalese and legal style. But the rule nonetheless highlights the considerable advantage of foreclosure proceedings to the debtor: that it occurs not in the confines of a bank's boardroom but in the transparent auspices of a court of law. An action has to be started and the owners copies on the action and all background paperwork (i.e. affidavits) and adequate notice given of any hearing, and the right to be heard.

The mortgagor usually gets one last chance to pay back the missing payments which led to the foreclosure in the first place. This extra time - up to six months - afforded by the legal proceedings is often the difference maker as a desperate home-owner make those painful but often necessary calls to family members begging for a private loan to keep his family home.

This is called a decree or order nisi - as it is not yet final and absolute and suspends the foreclosure during the redemption period.

Some jurisdictions set the redemption period in a statute leaving the judge no wiggle room. Other jurisdictions leave it to the judges, who usually, over time, develop a general time-frame, such as six months.4

"The redemption should not be less than six months unless the premises are abandoned or suffering waste. The fact that premises are vacant does not necessarily mean that they are abandoned; or the mortgagor has no equity and is unlikely to be able to refinance and the mortgagee will likely suffer a loss or increased loss if the usual order is made....

"Even in these circumstances, an immediate order absolute or a shortened redemption period will not always be made, particularly in the case of residential premises where the mortgagor is in occupation. The court retains a discretion in this connection, but, in most cases, the position of the mortgagee should not be worsened materially.

"The expectation (is) that (the mortgagors) should have some time to attempt to extricate themselves from their predicament..."

"One must start with the proposition that the usual period of redemption is six months. The shortening of that period is a matter of sound judicial discretion. The burden is on the mortgagee to show facts which warrant the court depriving the mortgagor of what is almost an implied term that he has six months to redeem. The court frequently shortens the time when the mortgagor has, as the saying is, no equity, meaning that if the land were sold and the mortgage debt discharged, the mortgagor would get nothing."

Once the deadline of the redemption period comes and goes, and if the mortgagor has not complied with the terms of the order nisi, the lender (mortgagee) can apply for an order absolute which extricates the redemption right, and makes the lender owner of the property and, usually, that property is instantly put up for sale by the lender and the proceeds used to pay off the outstanding loan.

Don't Be A Mousy Mortgagor

Learn your rights before caving into the overbearing demands of a bank on the first days of any default upon a mortgage.

Before you give away the family home, call a lawyer! But, admittedly, even that can be a challenge as lawyers recognize that a person facing foreclosure is usually bereft of funds and yet the lawyer does not work for free: can you spell r-e-t-a-i-n-e-r? The bank's lawyer, especially in cities, is well-trained and may do nothing but foreclosures day in and day out, a tough, deep pockets opponent for an under-paid defendant lawyer who works for the little guy with no money to begin with.

It's an uphill battle but knowing your rights and the ins and outs of the process can, literally, save the family home.

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Duhaime Lawisms

To put off making your Will until the hand of death is upon you evinces either cowardice or a shameful neglect of your temporal concerns.
Edward Burtenshaw Sugden, aka Lord St. Leonards (1781-1875)

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Unless otherwise noted, this article was written by Lloyd Duhaime, Barrister, Solicitor, Attorney and Lawyer (and Notary Public!). It is not intended to be legal advice and you would be foolhardy to rely on it in respect to any specific situation you or an acquaintance may be facing. In addition, the law changes rapidly and sometimes with little notice so from time to time, an article may not be up to date. Therefore, this is merely legal information designed to educate the reader. If you have a real situation, this information will serve as a good springboard to get legal advice from a lawyer.